Four main steps to organise your CbC reporting strategy and implementation
What is the best way to organise the preparation and filing of a group’s Country-by-Country (CbC) report? In light of the new OECD guidance on the implementation of CbC-reporting of April 2017, there are four main steps that will help you to complete the process.
The OECD introduced the concept of CbC-reporting in the context of Action 13 of the OECD/G20 BEPS project. All EU member states and most non-EU OECD members have implemented the CbC-reporting obligations as per fiscal year 2016 based on the guidance and model legislation issued by the OECD. Some countries have postponed first obligatory CbC-report filing and exchange to a later fiscal year (like Switzerland per 1 January 2018).
Complying with CbC-reporting rules does not simply come down to assembling and reporting group figures. The objective of CbC-reporting for MNEs is to demonstrate a consistent global allocation of profits and taxes aligned with the business activities of the group. Strategic aspects should be taken into account throughout the process as the shown blueprint of the group will likely be the basis of local audit discussions in different countries where the group operates.
To prepare for CbC-reporting, MNEs are advised to develop an action plan. With the right approach, the MNE will be more efficient, accurate, and prepared for discussions and audits. Such an action plan could incorporate the following steps.
Step 1: Identify scope of obligations
The MNE first determines (i) whether CbC-reporting applies, (ii) which entities are included (so-called “Constituent Entities” (CE)) and (iii) which entity will submit the CbC-report.
CbC-reporting does not apply if the MNE’s annual consolidated group revenue in the immediately preceding fiscal year is below EUR 750 million or a near equivalent amount in domestic currency as of January 2015. According to the OECD guidance, a group that does not exceed the local threshold of the Ultimate Parent Entity (UPE) should not be exposed to local filing in any other jurisdiction that is using a threshold denominated in a different currency.
Near Equivalent Amount (CH)
Switzerland applies a threshold of CHF 900 million as determined on 1 January 2015.
The governing principle to determine which group entities are included in the CbC-report is to follow the accounting consolidation rules. Reporting applies to all entities which are included in the consolidated financial statements or would be if equity interests in such entity were publicly traded. Also entities excluded from the consolidated statements solely on size or materiality grounds and permanent establishments (PE) are included. The financial data of group entities for which the accounting rules require proportionate consolidation may be pro-rated. Subsidiaries for which the accounting rules provide that the investment should be reported at fair value through profit and loss (equity method) are not included since no consolidated accounts have to be prepared (e.g. investment funds following investment entity exception, joint ventures).
The starting point is that the MNEs’ UPE files the CbC-report annually in its jurisdiction. In the absence of such filing or the effective exchange of such report, each CE will be obliged to file the CbC-report, unless a qualifying replacement (so-called “Surrogate Parent Entity”) is appointed by the group as sole substitute. When electing the “best” surrogate filing jurisdiction, MNEs should take into account local timing of filings and size of information exchange networks, as well as avoiding jurisdictions having introduced limited CbC-reporting obligations.
Voluntary Filing (CH)
Switzerland, which will not implement CbC-reporting as per 2016, confirmed to introduce a voluntary filing system for the UPEs (so-called “Parent Surrogate Filing”). For reporting years before 2018, groups may voluntarily submit CbC-reports to the Swiss federal tax administration who would then transmit submitted CbC-reports to individual countries on a confidential basis.
Step 2: Collection of data
Source of information
MNEs have the flexibility to use a wide variety of organised sources of financial information (consolidation package, statutory financial statements, regulatory statements, or internal management accounts), subject to consistency. MNEs are not obliged to reconcile revenue, profit, and tax reporting in the template to the consolidated financials and are not required to make adjustments for differences in accounting principles applied in different tax jurisdictions. It should be assessed upfront which sources are most suited for this purpose.
Manage input per jurisdiction
The MNE should manage input from different parts of the enterprise for various jurisdictions and decide on a bottom up or top down strategy. The collected data should subsequently be reviewed across all countries to ensure consistency.
In collecting data, the MNE will need to make judgements on input, since the content of the OECD guidance is at times ambiguous. Finally, attention should be given to items having a larger scope than generally expected. In this respect, the following should be kept in mind:
- Revenues - The term “Revenues” has a larger scope than the accounting term “turnover” and includes revenues from sale of inventory and properties, services, royalties, interest, premiums and any other amounts (including extraordinary income and gain from investment activities, however only the net amount if reported on a net basis under applicable accounting rules). Revenues exclude dividend payments received from other CEs.
Income tax paid - The definition of income tax paid includes cash taxes paid in any tax jurisdiction in the reporting year as well as withholding taxes paid on payments received. It is strongly recommended for MNEs to organise their systems in such a way that gross payments and withholding taxes are separately accounted for.
Employees – MNEs are free to report the number of employees on an FTE basis at year-end, based on average employment levels, or on any other basis if consistently applied. MNEs may further opt to report independent contractors participating in the ordinary operating activities of the CE as employees. In choosing the approach, a MNE should consider the impact on demonstrating substance in certain jurisdictions as well as on drawing the attention to risks in others (notably regarding the existence of PEs).
Step 3: Analysis of data and completing CbC-report
Once all data have been collected, MNEs should analyse the outcome by identifying red flags, inconsistencies and potential vulnerabilities for instance through a “CbC-Dashboard” analysis. Such analysis may require a reconsideration of the CbC-reporting strategy.
After analysis and reconsideration, the CbC-report, can be finalized. In doing so, the MNE may identify certain difficulties to be solved, e.g. currency issues, elimination & allocation of group corrections.
It is essential to align the information in the CbC-report with the information disclosed in the group’s transfer pricing documentation (in particular the master file and local file), as well as with other sources of information available to tax authorities (e.g. website, financial statements, tax returns). Although not required by OECD guidance, tax authorities might require a reconciliation of the CbC-report with the locally filed corporate income tax returns.
Through reconciliation, MNEs may identify inconsistencies and remaining red flags. If inconsistencies cannot be eliminated, MNEs should review the CbC-reporting strategy and prepare an explanation for the tax authorities.
Step 4: Identify strategic opportunities
Review transfer pricing policy
Although CbC-reporting will increase the MNEs’ compliance burden, it can also be used as a means to identify opportunities and take strategic decisions. Together with the master file and local file, the CbC-report is indeed a way to improve and manage the group’s transfer pricing compliance and risks. This could lead to making changes to intercompany transactions and pricing or even restructuring the group (e.g. onshoring IP, increasing substance) to improve and influence the alignment of profits to business activities generating profits.
Beat BaumgartnerPartner Attorney at law, Swiss certified tax expert
Beat Baumgartner, attorney at law and Swiss certified tax expert, is a partner in our Zurich office. He focuses on Swiss and international taxation, M&A, financing and capital market transactions.T: +41 43 434 67 10 M: +41 79 930 63 52 E: firstname.lastname@example.org